JPMorgan implements blockchain for collateral settlement for the first time as the firm continues to embrace the new technology. It was a pilot transaction involving BlackRock’s assets, the largest asset management firm globally. BlackRock was not directly involved, but JPMorgan carried it out of its own volition. It shows that the firm has embraced blockchain and crypto completely. They also replaced real estate with crypto as a preferred alternative asset a while back.
JPMorgan uses blockchain for collateral settlement
On May 20th, when JPMorgan used blockchain for collateral settlement, it transferred mutual funds shares in tokenized form as collateral. While BlackRock, whose funds were involved in the transaction, was not involved directly, they are exploring blockchain as well. This was reported by JPMorgan’s global head of trading services.
The use of blockchain technology will allow more types of assets as collateral and make transactions possible outside the market hours. JPMorgan experienced a frictionless transfer of collateral assets with blockchain technology. And very soon, the firm also plans to expand tokenized collateral to equities and fixed income.
What are collateral management and settlement?
For hundreds of years, collateral has been used to offer security against the chance of payment default by the opposite party in a deal. Bankers Trust and Salomon Brothers were the first to accept collateral against credit exposure in the 1980s. There were no legal guidelines, and most computations were done by hand on spreadsheets. In the early 1990s, derivatives exposures were widely collateralized. The first ISDA documentation began standardization in 1994.
However, collateral management has developed significantly in the previous 15–20 years as a result of increased use of new technology, competitive pressures in the institutional finance industry, and increased counterparty risk due to the widespread use of derivatives, asset pools securitization, and leverage. As a result, collateral management has evolved into a very complicated process involving various stakeholders and interconnected activities.
The final step that comes in collateral management is the transfer of ownership, where JPMorgan has started to use blockchain. It is called Collateral Settlement.
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